HOLLYWOOD, Fla. -- The U.S. will win the global currency race to the bottom but decimate its economy in the process, economist Peter Schiff said.

With global central banks using currency manipulation to spur growth, capital markets have been awash in talk of what the fallout will be for investing strategies and consumers who may have to bear the weight of inflation.

(Read More: G-7 Fires Warning Shot Over Currencies)

Longtime Federal Reserve critic Schiff said the central bank is being forced to prop up an ailing U.S. economy and the only way it can is by weakening the dollar.

"There is a currency war going on," Schiff said at the Inside ETFs conference presented by Index Universe. "The irony of a currency war which makes it different from other wars is the object is to kill itself. Unfortunately, I think the U.S. is going to win the currency war."

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The CEO of Euro Pacific Capital in New York has been one of the market's most outspoken supporters of gold as a hedge against inflation specifically and global turmoil in general.

He believes the metal will be a prime beneficiary of the currency war, while consumers will be its main victim.

Government cost-of-living indexes such as the consumer price index are a "total fraud. Consumer prices in the U.S. are moving up much faster than indicated by the CPI. It is manipulated. It is deliberately designed to mask inflation, not report it," he said.

As for U.S. economic prospects, Schiff believes they are gloomy.

Gross domestic product indicated a slight contraction in the fourth quarter, though most economists expect that to change in future revisions and growth to be steady but modest through the year. In the meantime, the European sovereign debt crisis is beginning to return to the news as well, though the stock market hasn't seemed to mind any of it.

(Read More: ECB'S Draghi Says Currency War Talk Exaggerated)

But that could change quickly.

"We're broke. We owe trillions. Look at our budget deficit, look at the debt to GDP (ratio), the unfunded liabilities," Schiff said. "If we were in the euro zone they would kick us out."

For Schiff, such talk, though incendiary, is fairly routine.

He found a good deal of interest at the conference, though, with attendees crowding him after his panel discussion even as some other participants were beginning to catch flights out.

"The Fed knows that the U.S. economy is not recovering," he said. "It simply is being kept from collapse by artificially low interest rates and quantitative easing. As that support goes, the economy will implode."

Of the many points for consideration there, I note how hard the first Euro downturn hit the US markets. Indeed is not part of the argument that current DOW numbers are due to international diversification of many of the constiutuent companies of the Index?

I am seeing things that Euro may be heading for a double dip of what it has already experienced. (What do people do with the bankruptcy of nanny fascism?) If one no longer believes in the market as the supreme leading indicator (efficient market theory et al) and instead sees it as a zero sum gambling casino with the attention deficit disorder of massive trainding program algorithims of hedge funds, then one may conclude the coming Euro crackup may will hit the Dow hard and fast.

"Indeed is not part of the argument that current DOW numbers are due to international diversification of many of the constituent companies of the Index?"

Yes, but most are moving beyond Europe as well as moving beyond the US. They can go into India, China, Brazil, or wherever they see growth, but at some point the planet is too small for large enterprises to escape economic failure in the largest economies. Also some management within these companies will bet wrong on the Wesbury theory, that governments can set all the policy levers wrong and the economy will grow just fine anyway.

Crafty continued: "I am seeing things that Euro may be heading for a double dip of what it has already experienced. (What do people do with the bankruptcy of nanny fascism?) If one no longer believes in the market as the supreme leading indicator (efficient market theory et al) and instead sees it as a zero sum gambling casino with the attention deficit disorder of massive training program algorithms of hedge funds, then one may conclude the coming Euro crackup may will hit the Dow hard and fast"

When it looks like zero-sum, it is time to be out - unless you are truly smarter and quicker than all the other players. I don't know the future of the DOW but under what theory is it immune from everything happening around it?

If the Fed expansion caused the housing bubble (I will post the Forbes piece today separately) then is it not the Fed expansion today causing artificially high stock prices? When exactly does that correct, no one knows.

All these taxes, rules and regulations keep out startups and newer, weaker competitors, and actually help the entrenched players to a point. The DOW, NASDAQ and S&P are indexes of the entrenched players, not of the economy as a whole. The big health insurers just got 30 million new customers for example, and the subsidies to help to sell autos, furnaces etc. But these lines can't go in opposite directions forever. These companies are not fully insulated from the other troubles in the economies. Yes, if I was in the market I would be very worried. If gold were at 400 or even under a thousand I might say put it all there. At 1600-1800 an ounce, who knows. The money most of us have won't buy much gold. No easy answer except to think wisely about playing defense.

"Wait until the dollar crashes, it'll make the end of the euro look clean in comparison."

Yet muddying the waters is that money fleeing the Euro may well come out way first.

Also, we really need to keep in mind that there are some powerful forces to the good building on the energy front for the US. The free market is a powerful thing and can be hard to hold down sometimes.

Unfortunately, the full faith and credit of the US isn't what it used to be, and people are starting to figure that out globally. Should China introduce a gold backed Yuan, things might change rapidly as the US credit rating drops and our nat'l debt spirals ever upwards.

'Loose Talk' and Loose Money The G-20 concedes that central banks rule the world economy..

The main message out of the Group of 20 nations meeting in Moscow on the weekend boils down to this: Countries can continue to devalue their currencies so long as they don't explicitly say they want to devalue their currencies. Markets got the message and promptly sold off the yen on Monday in anticipation of further monetary easing by the Bank of Japan.

This contradiction between economic word and deed shows the degree to which policy makers have defaulted to easy money as the engine of growth. The rest is commentary.

The days before the Moscow meeting were dominated by blustery fears about the "currency war" consequences of money printing in the service of devaluation. Lael Brainard, the U.S. Treasury under secretary for international affairs, gave a speech in Moscow warning against "loose talk about currencies." She seemed to have in mind Japan, whose new prime minister Shinzo Abe has made a weaker yen the explicit centerpiece of his economic policy.

In the diplomatic event, all of that angst went by the wayside. The G-20 communique bowed toward a vow to "refrain from competitive devaluation." But the text also repeated its familiar promise "to move more rapidly toward more market-determined exchange rate systems"—words that essentially mean a hands-off policy on currency values. So Japan can do what it wants on the yen as long as it doesn't cop to it publicly.

That message was also underscored by Federal Reserve Chairman Ben Bernanke, who implicitly endorsed Japan's monetary easing and declared that the U.S. would continue to use "domestic policy tools to advance domestic objectives." When the chief central banker of the world's reserve currency nation announces that he is practicing monetary nationalism, it's hard to blame anyone else for doing the same.

The upshot is that this period of extraordinary monetary easing will continue. Economist Ed Hyman of the ISI Group counts dozens of actions in recent months in what he calls a "huge global easing cycle." The political pressure will now build on the European Central Bank to ease in turn to weaken the euro. South Korea and other countries that are on the receiving end of "hot money" inflows may feel obliged to ease as well to prevent their currencies from rising or to experiment with exchange controls.

This default to monetary policy reflects the overall failure of most of the world's leading economies to pass fiscal and other pro-growth reforms. Japan refuses to join the trans-Pacific trade talks that might make its domestic economy more competitive. The U.S. has imposed a huge tax increase and won't address its fiscal excesses or uncompetitive corporate tax regime. Europe—well, suffice it to say that Silvio Berlusconi is again playing a role in Italian politics and the Socialists are trying to resurrect the ghost of early Mitterrand in France.

So the central bankers are running the world economy, with the encouragement of politicians who are happy to see stock markets and other asset prices continue to rise. Here and there someone will point out the danger of asset bubbles if this continues—ECB President Mario Draghi did it on Monday—but no one wants to be the first to take away the punchbowl. It's still every central bank, and every currency, for itself.

The Producer Price Index (PPI) rose 0.2% in January, coming in slightly below the consensus expected gain of 0.3%. Producer prices are up 1.4% versus a year ago.The increase in the overall PPI was due to food and pharmaceuticals, which rose 0.7% and 3.5% respectively. Energy prices fell 0.4%. The “core” PPI, which excludes food and energy, was up 0.2%.Consumer goods prices were up 0.2% in January, while capital equipment prices rose 0.1%. In the past year, consumer goods prices are up 1.5% while capital equipment prices are up 1.1%.Core intermediate goods prices were up 0.3% in January and are up 0.7% versus a year ago. Core crude prices fell 0.3% in January, and are down 3.7% versus a year ago.Implications: Despite a continued drop in energy prices, overall producer prices rose 0.2% in January, the first upward move in four months. Given higher energy prices so far in February, we anticipate another larger gain in overall prices in next month’s report. “Core” prices, which exclude food and energy and which the Federal Reserve claims are more important than the overall number, were also up 0.2% in January and tell a somewhat different story than the overall PPI. In the past year, overall producer prices are up 1.4% while core prices are up 1.8%. But, in the past three months, energy prices have pushed down overall producer prices to a negative 1.8% annual rate even as core prices rose at a 2% rate. Some analysts may suggest that with the overall PPI up only 1.4% from a year ago that the Federal Reserve has room for the new round of bond buying it announced a couple of months ago. We think this is a mistake. Core prices are likely to continue growing at roughly the recent pace. Food inflation has been moving upward and may continue to do so given recent improvement in emerging economies, and energy prices are now headed upward again as well. Monetary policy is loose enough already. The problems that ail the economy are fiscal and regulatory, not monetary. Adding even more excess reserves to the banking system is not going to boost economic growth. Given the loose stance of monetary policy, higher inflation is eventually on the way.

Getty Images The U.S dollar is shrinking as a percentage of the world's currency supply, raising concerns that the greenback is about to see its long run as the world's premier denomination come to an end.

When compared to its peers, the dollar has drifted to a 15-year low, according to the International Monetary Fund, indicating that more countries are willing to use other currencies to do business.

While the American currency still reigns supreme -- it constitutes $3.72 trillion, or 62 percent, of the $6 trillion in allocated foreign exchange holdings by the world's central banks -- the Japanese yen, Swiss franc and what the IMF classifies as "other currencies" such as the Chinese yuan are gaining.

(Read More: Hedge Funds Reap Billions on Yen Bets)

"Generally speaking, it is not believed by the vast majority that the American dollar will be overthrown," Dick Bove, vice president of equity research at Rafferty Capital Markets, said in a note. "But it will be, and this defrocking may occur in as short a period as five to 10 years."

Bove uses several metrics to make his point, focusing on the dollar as a percentage of total world money supply.That total has plunged from nearly 90 percent in 1952 to closer to 15 percent now. He also notes that the Chinese yuan, the yen and the euro each have a greater share of that total.

"To the degree that China succeeds in increasing its market share of the world's currency market, the United States is the loser," Bove said. "For years, I have been arguing that the move of the Chinese makes perfect sense from their point-of-view but no sense for the Americans."

Play VideoHedge Funds Make Billions Betting Against Yen Hedge funds are making billions betting against the Japanese yen. Greg Zuckerman, author of "The Greatest Trade Ever," offers insight.For a country with a budget deficit in excess of $1 trillion a year, the consequences of losing standing as the world's reserve currency would be dire.

(Read More: US Credit Risk Appetite Signals a 'Sell'?)

"If the dollar loses status as the world's most reliable currency the United States will lose the right to print money to pay its debt. It will be forced to pay this debt," Bove said. "The ratings agencies are already arguing that the government's debt may be too highly rated. Plus, the United States Congress, in both its houses, as well as the president are demonstrating a total lack of fiscal credibility."Bove is not the only one sounding the reserve currency alarm, though the issue has fallen off the front pages as hopes for a sustained U.S. recovery have taken hold and the stock market has surged to near-record highs.

But the looming battle over budget sequestration in Washington could revive long-standing fears of fiscal stability.

"If (dollars) no longer offer the safety that investors have come to expect, they will not function as the stable collateral required by bank funding markets," Barry Eichengreen, a professor at the University of California, Berkley, warned in a Financial Times commentary late last year. "They will not be regarded as an attractive form in which to hold international reserves. And they will not be seen as a convenient vehicle for merchandise transactions."

To be sure, the markets at this point are not acting like the dollar is in severe trouble. The greenback has maintained its position as a general safe haven in times of trouble.

(Read More: Russia: Don't Compete Through Currency Devaluations)

"Longer term, of course, countries are going to diversify away from the dollar if they can. There are more favorable investment opportunities out there if you can catch yield," said Christopher Vecchio, currency analyst at DailyFX, a trading firm. "Despite the increase in risk to the U.S. dollar and Treasury, investors still feel safest at home."

But the Federal Reserve's successive quantitative easing programs, which have created $3 trillion in new greenbacks, continue to spur worry over the dollar's status.

"The No. 1 security issue we have as a nation is the preservation of the U.S. dollar as the world's reserve currency," said Michael Pento, president of Pento Portfolio Strategies. "It's a thousand times more important than a nuclear bomb being tested by North Korea. It's a thousand times more important that we keep the dollar as the world's reserve currency, and yet we are doing everything to abuse that status."

The dollar's seemingly precarious status is why Pento remains bullish on gold and believes the dollar's demise as the premier reserve currency could end even sooner than Bove predicts -- perhaps by 2015.

"Five to 10 years -- that would be an outlier," he said. "I would say 2015, 2016, that would be the time when it becomes a particularly salient issue. When we're spending 30 to 50 percent of our revenue on debt service payments, we enter into a bond market crisis. The dollar starts to drop along with bond prices. That would set off the whole thing."

The Consumer Price Index (CPI) was unchanged in January, coming in below the consensus expected gain of 0.1%. The CPI is up 1.6% versus a year ago.“Cash” inflation (which excludes the government’s estimate of what homeowners would charge themselves for rent) was also unchanged in January but is up 1.4% in the past year.The unchanged CPI in January was the result of a 1.7% decline in energy prices offsetting increases in most other major categories. Food prices were unchanged. The “core” CPI, which excludes food and energy, was up 0.3% in January and is up 1.9% versus a year ago. The consensus expected a gain of 0.2% in January.Real average hourly earnings – the cash earnings of all employees, adjusted for inflation – were up 0.2% in January and are up 0.6% in the past year. Real weekly earnings are up 0.3% in the past year.Implications: For the time being, overall consumer price inflation remains quiet. Consumer prices were unchanged in January and are up only 1.6% from a year ago. Once again, falling energy prices offset gains in most other major categories. That’s been the recent theme, with the overall CPI down at a 0.7% annual rate in the past three months, all due to energy. The reason that’s important is that energy prices have spiked higher in February, so we are likely to see overall prices move higher as well when that data arrives in a month. “Core” prices, which exclude food and energy, were up 0.3% in January, coming in above consensus expectations and the largest monthly increase since May 2011. Core prices are up 1.9% from a year ago. Neither overall or core price gains in the past year sets off alarm bells. Instead, they suggest the Federal Reserve’s preferred measure of inflation, the PCE deflator (which usually runs a ¼ point below the CPI) remains comfortably below the Fed’s target of 2%. We don’t expect this to last. However, for the Fed, the key measure of inflation is its own forecast of future inflation. So even if inflation goes to roughly 3% within the next year, as long as the Fed projects the rise to be temporary it will not react by raising short-term interest rates. The Fed is more focused on the labor market and, we believe, is willing to let inflation exceed its long-term target of 2% for a prolonged period of time in order to get the unemployment rate down. The best news in today’s report was that “real” (inflation-adjusted) average hourly earnings rose 0.2% in January. In the past three months they are up at a 4.4% annual rate. In other news this morning, new claims for unemployment insurance increased 20,000 last week to 362,000, very close to the four-week moving average of 361,000. Continuing claims for regular state benefits increased 11,000 to 3.15 million. These figures are consistent with continued moderate payroll growth in February.

We all know that the US dollar is losing value through inflation every year; in fact, the dollar has lost over 97% of its purchasing power over the last century. When “real money” (i.e. backed up with intrinsic value) was used, a cup of coffee in the 1920s costed about a few cents. In a fiat world, where money’s value is ambiguous, a cup of coffee can cost upward to a 100 trillion dollars, as was the case in Zimbabwe in recent times. Just how much more can the remaining 3% be debased from the US dollar, and how fast can it happen?

A slow, gradual decline can occur without any one person ever even noticing the effects– until, that is, a “black swan”event comes along and triggers the psychology of investors to quickly reverse their thinking, and here a collapse can literally happen overnight. A “black swan,” a term coined by Nassim Nicholas Taleb in his bestselling book The Black Swan, is “an event, positive or negative, that is deemed improbable yet causes massive consequences.” In his book he describes the psychology biases that makes people individually and collectively blind to a rare event. He also notes that the more complex a system is, the more prone it is to failure as there is more room for glitches and errors. This analogy can be used to describe the complexity of the US global empire, complete with its massive debt and 900 military bases around the world. This article is taking a “black swan” approach to the US dollar.

Here are nine events that could trigger a black swan event that would result in a US dollar collapse. The reasons below are not in order of importance, and all them can prove to be negative for the US dollar.

1. The Fed Chooses to engage in currency wars by being the spender of last resort and printing money to oblivion

When people think of a collapse, they often think of a deflationary setting. But a collapse can also occur when the face value of the currency goes up–or skyrockets upwards, as did the currency in Zimbabwe, when everyone was suddenly eligible to be a “trillionaire.” (Webster needs to update their dictionary with this word). When the face value of a currency skyrockets, the purchasing power decreases, and these are usually the ingredients for hyperinflation and collapse.

It took the US 200 years to issue $3 trillion dollar in M3 money supply. Greenspan increased this to $10 trillion dollars in his eighteenth year as Fed chairman. How much has it increased under Ben Bernanke, in his seven years as chairman of the Fed? Your guess is as good as mine, actually, because the exact number is unknown: the Fed no longer reports this statistic as of 2006, exactly when Bernanke entered office. What a coincidence!

With QE 3 and QE 4, the Fed now prints a total of $85 billion a month, most of which is reportedly being held in reserves. Even with these rock bottom low interest rates, credit demand is weak. There is plainly too much uncertainty.

If the stock market were to crash again as it did in 2008, and the Fed were to consequently launch QE5, then QE6 and so on… This would hardly be, in reality, a “black swan” event since it is probable, but nevertheless, it could eventually lead to hyper-inflation and a total collapse of the dollar, where people would lose purchasing power of the dollar as in the case of Zimbabwe. This is more likely to occur if the US dollar also loses its reserve currency status.

2. The Fed’s printing press “jams” and ceases to stops printing money

As I’ve stated before, the Fed will most likely not stop printing money. During the December 2012 FOMC meeting, this belief was supported. The most important reason why the Fed needs to continue printing money is so that it can hold interest rates artificially low to stimulate the economy. Normally, higher interest rates would increase the value of the dollar, as this would cause people to deleverage from investments and increase the demand for dollars. However, the structural imbalances the economy has undertaken from a decade of artificial low interest rates would implode the economy from high interest rates now. Undoubtedly, if the Fed stops printing money, this will mostly cause higher interest rates. This will lead to increased bankruptcies, higher unemployment, more foreclosures, lower tax revenue for the US government, and increased interest on the national debt. In this situation it could lead to the bankruptcy of the US as they could default on their own debt.

Interest rates in the 80′s were increased signficantly to kill inflation, however the US debt was nowhere near what it is today (even in terms of % of GDP). At the present moment, the US is paying over $1 billion a day just in interest payments to service its debt. A slight increase in interest rates would significantly increase these payments and leave the US with even more debt than it already has, increasing their trillion dollar per year deficits. This is a scenario whereby the US could default just as Argentina did in the early 2000′s.

If they were to stop printing money, the Fed could trigger a dollar collapse, especially if foreigners decide to no longer lend the US any more money, and start dumping US debt from their foreign reserves.

3. Rise of “Gotham City” and the Vigilantes

We know that the US is currently the largest debtor nation in the history of the world, operating on yearly trillion dollar deficits. What if the US citizens were to “wake up” and collectively stop paying their taxes? What if they were to collectively choose to no longer support political decisions that serve to perpetually increase the debt? An increase in debt ruins the prospects for future generations, after all. Taxes are essentially the life-line of any government. A cut on this life-line is like cutting the main artery to the heart. Without a tax base, government can no longer pay its bills.

A significant internal revolution by citizens would entail a collective refusal against the paying of taxes and the continual raising of the debt ceiling. Perhaps these citizens might even become bond vigilantes and sell US bonds, especially if other countries became US bond vigilantes and sell their US bonds, as well. This would likely collapse the dollar, and send the US dollar into hyper-inflation.

4. China, the largest financier of the US debt, drops the debt bomb

The Chinese can drop the debt bomb on the US just by selling a fraction of their US treasury holdings. As of June 2012,

the Chinese owned $1.16 trillion in US debt (US government treasury bonds). Japan owns $1.11 trillion and the OPEC nations, $261 billion. In the last few years, China has been lowering their purchases of US debt and replacing it with other assets. To circumvent this problem, the Fed of late has been stepping in to purchase treasury bonds to make up for the lost demand of the foreigners.

China’s power is the direct result of the symbiotic trade relationship with the US. The US buys goods from China in US dollars, and China ships them the products and uses the US dollar surpluses to buy US debt, among other assets.

It may not be in the interest of China to drop the debt bomb, but it definitely has the power to do it. If this is the case, there would be so much US debt on the market that other US debt holding countries could also throw their debt on the market as well as a result of panic and fear. Triggering an international run on US debt. The US Dollar will surely collapse in this scenario.

What if now the Chinese, instead of dropping the debt bomb, create enough bi-lateral trade agreements to avoid the US dollar altogether with foreigners? In fact China, among other countries, has already done this by trading with the Chinese Yuan instead of the US dollar. If China, Japan, Russian, Iran, Germany, Brazil, Australia, Chile, USE, India, and South Africa would continue to do so, other larger countries may follow suit and before you know it, the majority of trade would be transacted in non-US dollars. At this point, the US dollar would no longer be needed, and its world reserve currency status would collapse along with its purchasing power.

What could also trigger a large decline in the US dollar would be if a relatively large oil-producing country (like Saudi Arabia) refuses to use the US dollar to sell its oil, choosing instead something more tangible (like gold). William R. Clark’s excellent book, Petrodollar Warfare, treats this issue precisely, going in depth into the Petrodollar collapse and how the US maintains its dollar supremacy with its current imperialistic foreign policy. If a major OPEC nation refuses to sell its oil in US dollars, this could result in a total loss of confidence in the US dollar, precipitating its collapse.

6. “Good-bye Dollar, Hello SDR!” The U.N. and IMF implement a New World Reserve Currency

George Soros states in a recent video interview (see here) that the US needs a “New Financial World Order,” on the pretext that the current system is “broke” and creating huge trade imbalances. The Guardian stated the following:

“The International Monetary Fund warned that the colossal United States trade deficit was a noose around the neck of the economy, emphasizing that the once mighty dollar could collapse at any moment.”

Soros, a member of the Bretton Woods Committee–the same institution that created the IMF–is now promoting the Special Drawings Right (SDR) as a potential new world currency.

The progress for the SDR has been very slow and has not received much acceptance among other nations. However, note that the US currently controls the IMF by its voting powers (17% nominal interest, and a required of 85% majority for decisions). As more and more people lose confidence in the US dollar in general due to reckless monetary and fiscal policies, the IMF can instead back the SDR with gold to promote stability and confidence. That is certainly one realistic possibility considering that they reportedly own over 2,800 tons of gold. A shift in reserve currency from the US dollar to the SDR or other another currency would undoubtedly collapse the US dollar. It’s trade imbalance is sustained by it’s reserve status.

7. A “too-big-to-fail” corporation fails: A derivative shock-wave.

The Financial Stability Board (FSB) released a list of 29 “too big to fail” corporations operating around the world. According to the FSB, these banks are considered to be “systemically important financial institutions” and a failure of any one of these corporations could result in “financial systemic failure.” Of the 29 corporations on the list, 17 are based in Europe, eight in the U.S., and four in Asia.

A failure of any one of these banks, but especially one in the US, could create a bank run, further destroying the ability to provide credit and increasing the likelihood of a dollar collapse.

What is most likely to create a bank failure is a derivative failure. Actually, a current derivatives scandal is threatening to take down the world’s oldest bank:

“Banca Monte dei Paschi di Siena, the world’s oldest bank, was making loans when Michelangelo and Leonardo da Vinci were young men and before Columbus sailed to the New World. The bank survived the Italian War, which saw Siena’s surrender to Spain in 1555, the Napoleonic campaign, the Second World War and assorted bouts of plague and poverty.

But MPS may not survive the twin threats of a gruesomely expensive takeover gone bad and a derivatives scandal that may result in legal action against the bank’s former executives. After five centuries of independence, MPS may have to be nationalized as its losses soar and its value sinks.”

The precise, total amount of global derivatives in the market is not exactly known, but estimates range from 650 trillion to 1.5 quadrillion dollars. This amount dwarfs the world’s GDP at approximately $70 trillion. (Refer to this article to see what $16 trillion looks like.) It is no wonder why Warren Buffet calls derivatives the “financial weapons of mass destruction.”

According to the Controller of Currency and National Banks, here are the stats for the following banks as of September 2012:

JPMorgan Chase

Total Assets: $1.85 trillion dollars

Total Exposure To Derivatives: $71.07 trillion dollars

Citibank

Total Assets: $1.365 trillion dollars

Total Exposure To Derivatives: $55.51 trillion dollars

Bank Of America

Total Assets: $1.448 trillion dollars

Total Exposure To Derivatives: $43.79 trillion dollars

Goldman Sachs

Total Assets: $120.43 billion (not trillion)

Total Exposure To Derivatives: $41,23 trillion

Note that JP Morgan alone has more derivative exposure than the world’s GDP. A derivative collapse is definitely an event that could take down the whole financial system and collapse the US dollar.

8. A run on the gold and silver bullion exchanges

Andrew McGuire, a former Goldman Sachs trader, disclosed that the London bullion Market Association (LBMA) trades on a net basis each year of $5.4 trillion dollars, a little less than half the size of the US economy. The LBMA is the biggest gold commodity market in the world.

But how can the LBMA do this be when the gold market is such a tiny market? The world production of gold is about 2,500 metric tons of gold (88,184,905 oz) which at today’s price of $1,667 is approximately $147 billion in yearly production value.

The LBMA is the equivalent of a fractional reserve system in that it is leveraged 100 to 1. For every ounce of real gold that is sold, 100 ounces of paper gold is sold, meaning there are 100 claims on each and every ounce of gold. These numbers were verified by Jeffrey Christian, a gold expert and founder of CMP Group (a commodities research, consulting, investment banking, and asset management company). The leverage is absurd.

The LBMA can be compared with other exchanges. The world’s gold market is backed up by approximately 2.3% of real gold. If a mere 2.5% of people would start demanding their gold, the physical gold market would explode, subsequently crushing the dollar, as the value of the dollar is inversely proportional to the price of gold.

Hedge fund manager Kyle Bass pointed out that the New York Comex has only approximately 3% of the bullion on hand to cover future contracts positions. and this game will continue if people do not demand delivery of their gold. The emperor has no clothes!

Venezuela has actually just recently received their last shipment of gold bars from the US.

“This was the largest type of operation to transport this type of metal in the last fifteen years,” said Merentes. “The repatriation of our gold was an act of financial prudence and sovereignty.” (Bloomberg)

The Germans and the Dutch have also recently requested their gold to be repatriated from the US. However, unlike Venezuela, Germany was told to wait seven years to get their gold back. That sounds odd, right?

Now the Swiss, under their recently launched Swiss Initiative to Secure the Swiss National Bank’s Gold Reserves, are hinting that they might want to get their gold back on Swiss soil. The Swiss government has a long standing tradition of backing their currency with gold.

This gold repatriation is turning out to be much bigger than a political statement. It is a total non-compliant/non-confidence vote for the US and the US dollar.

Which country is next? Mexico? They have 96% of their gold stored in the US and London.

A central bank gold rush to repatriate a country’s gold from the US can cause a huge upward demand for gold, pushing the price of gold upward and crushing the US dollar. (Especially if the Fed doesn’t have their gold and has been leased out into the market)

We have just gone through nine black swan events–events, remember, that are highly improbable but yet, when they do happen, have massive consequences. In Part 2 of this article, we will go through four other “black swan” events that could cause the US dollar to collapse.

It is a long standing proposition of many, supported on both theoretical and historical grounds, that one of the surest roads to hyperinflation is one grounded in a government whose answer to every economic and social problem is to borrow and spend the problem away, supported by a central bank able, willing and ready to finance the effort. That support is of course to simply print the money through which to buy the debt so issued by the government – what is euphemistically called monetizing the debt – thereby exploding the supply of money and eventually trashing its value.

First I would note a problem with the graphs which is quite common with many graphs and is a pet peeve of mine: A change from 20 to 40 is a 100% increase, yet a change from 100 to 120 is a 20% increase, yet the chart visually gives the impression of a constant rate of growth. In other words, the bias is strongly towards visually overstating the rate of increase.

That said, the piece does focus in on some points worthy of serious consideration-- yet it has surprisingly analysis or content as to the WHY of foreign purchases of US debt or the possible triggers of a change in foreign behavior.

This is not to deny the merit of the piece, rather it is to express frustration at the incompleteness of its analysis.

Central banks are increasing purchases of gold, yen and China’s renminbi to reduce their dollar and euro holdings as a percentage of total reserves, the World Gold Council said.

Official holdings increased to more than $12 trillion in 2012 from $2 trillion in 2000, while the share of gold and currencies apart from the greenback tripled in absolute terms since 2008, the London-based council said today in a report. The group is funded by gold producers.

Central banks added 534.6 tons of gold to reserves in 2012, the most since 1964, the council said last month. Barclays Plc forecast government purchases of 300 tons in both 2013 and 2014. Currency debasement and inflation concerns will spur metal demand, Morgan Stanley said in a Feb. 25 report.

“Building gold reserves in tandem with new alternatives is an optimal strategy as central banks remain under-allocated to gold and many attractive alternatives are either too small or, as is the case with the renminbi, not yet open to broader international participation,” Ashish Bhatia, the manager for government affairs at the council, said in the report.

Barrick Gold Corp., the world’s largest producer, Newmont Mining Corp. and AngloGold Ashanti Ltd. are among council members.

China and Brazil agreed to trade in each other’s currencies just hours ahead of the BRICS summit in South Africa. The deal, which extends over a three-year period and amounts to an exchange of about $30 billion in trade per year, marks the latest effort among two of the world’s largest emerging economies to shift the dynamics of international trade that have long favored the U.S. dollar.

"Our interest is not to establish new relations with China, but to expand relations to be used in the case of turbulence in financial markets," Brazilian Central Bank Governor Alexandre Tombini said, Reuters reported.

By shifting some trade away from the U.S. dollar, the world’s primary reserve currency, the two countries aim to buffer their commercial ties against another financial crisis like the one that resulted from the collapse of the U.S. housing market bubble in 2008.

"Trade ties between China and Brazil are of great importance to the two countries' economies amid global woes and the member states' economic stability is vital for the BRICS mechanism," said Zhou Zhiwei, a researcher with the Chinese Academy of Social Sciences, Xinhua reported.

Trade between China and Brazil has exploded in recent years from $6.68 billion in 2003 to over $75 billion in 2012, and in 2009, China replaced the U.S. as Brazil’s main trading partner.

The trade deal comes before a summit of the BRICS nations (Brazil, Russia, India, China and South Africa) in Durban, where the group of five is expected to discuss the establishment of an international development bank.

"BRICS Development Bank will make the global financial sector more democratic," said Brazil's Minister for Development, Industry and Foreign Trade Fernando Pimentel, according to Xinhua.

China and has touted the proposed bank as an alternative to international financial institutions like the World Bank, which funds infrastructure and development projects in emerging economies around the world.

With a combined GDP of over $14 trillion, the BRICS is looking to expand its economic influence throughout African countries in particular.

"We are creating new axis of global development,” Anand Sharma, India's Minister of Commerce, Industry and Textiles, Xinhua reported. “The global economic order created several decades ago is now undergoing change and we believe for the better to make it more representative.”

A CURRENCY deal enabling the Australian dollar to be converted directly into Chinese yuan, slashing costs for thousands of businesses, is set to be the centrepiece of Julia Gillard's mission to China next weekend.

Australia would become the third country, after the US and Japan, to secure such an arrangement from China, which is Australia's top trading partner, with exports and imports totalling $120 billion last financial year.

"Online currency bitcoin had 20 percent knocked off its price overnight on Thursday as one of its major exchanges became the victim of a hacking attack leading to a sell-off in the virtual currency after reaching an all-time high."

"There is pretty much nothing that can be done. Large companies are frequently victims of these kinds of attacks. Even though we are using one of the best companies to help us fight against these DDoS attacks, we are still being affected."

ILLINOIS -- An active bill, S.B. 3341, takes a direct swipe at personal privacy and ownership of tangible, hard currency. The bill would require a traceable record of sale on precious metals, to allow the government knowledge of who owns real hard assets.

If enacted, it would prohibit the sale of precious metals for cash. Coin Dealers would be required to obtain a proof of ownership, create a record of the sale, and verify the identity of the seller, before buying precious metals. Records must be kept, and can be inspected by the Attorney General at any time.

An amendment also requires that coin dealers deliver DAILY REPORTS of coin transactions to the local police department.

If we have learned anything from history, it is to never let the government know what we own. President Franklin Roosevelt, police state hero of the 20th century, confiscated citizens gold via Executive Order and handed it over to his buddies at the Federal Reserve. Never register your valuables.

WORD ON THE STREET: The decentralized structure of the Fed is one of its most important features. It has deep roots in our nation’s federalist structure. Independent Federal Reserve Banks ensure that policy reflects the economic and geographic diversity of the nation.

Americans have always been skeptical of too much centralized authority. The structure of the Fed was deliberately designed to preserve a diversity of views and provide checks and balances. Indeed, I believe the diversity of opinion around the Federal Open Market Committee (FOMC) table is one of its great strengths and serves to improve the quality of our policy decision-making. As the famous American journalist Walter Lippmann once said, "Where all men think alike, no one thinks very much."

Preserving price stability, in my view, is the most important function of a central bank. In our modern economy, there is no other government agency that has the responsibility or capability to ensure the stability of the purchasing power of our nation’s currency.

I will be the first to admit that over the 100-year history of the Federal Reserve, its track record has been mixed. At times, it has been successful, and at other times, it has failed spectacularly.

You may remember that early last year, the FOMC announced an explicit long-run inflation target of 2% a year. While you might argue, correctly, that 2% inflation is not truly price stability, it is widely believed because of measurement problems and the risks of deflation, or falling prices, that a 2% average inflation target is a reasonable compromise when weighing all the costs and benefits. In fact, most central banks around the world have a similar target.

Average inflation over the last three years has been running about 1.8%, a little under our 2% target. I expect that personal consumption expenditure inflation will remain close to our goal over the next year or two.

However, as they say in the investment community, "Past performance does not guarantee future results." The Fed must remain vigilant. Inflation is a monetary phenomenon. It often evolves slowly, and what sometimes appear to be purely temporary or transitory movements in volatile individual prices, like oil or other commodity prices, can prove to be precursors of more sustained movements in prices in general.

Nevertheless, I expect that inflation will be near our 2% target over the medium to longer term. But to achieve this outcome, the FOMC will likely need to begin stepping back from the extraordinary accommodation it has been applying. I will return to this point shortly.

Let me turn now to other aspects of the economy, including the prospects for growth and employment. The link between monetary policy actions and economic growth and employment is quite different from monetary policy’s link with inflation. Economists understand that in the long run, inflation is a monetary phenomenon. Yet, in the long run, monetary policy cannot determine the growth of either output or employment. Even in the short run, the links between monetary policy and employment or output are tenuous at best and hard to predict.

The FOMC explained in its January 2012 statement of longer-term goals and objectives that factors other than monetary policy play the dominant role in determining the maximum level of employment. As a result, it is not feasible or desirable for the monetary authorities to specify a numerical objective for employment or unemployment.

Nevertheless, I have become increasingly concerned that many people inside and outside our government have come to expect too much from monetary policy. Monetary policy is not a panacea for all our economic ills. If society pressures monetary policy to overreach its capabilities, it will surely fail and, in doing so, will undermine not only the Fed’s credibility, but also monetary policy’s ability to deliver on the goals that it is most capable of achieving. The public and central bankers should scale back their expectations of the role and power of monetary policy.

Let me talk a little about the real economy, how I see it evolving and why I think the recovery has been so tepid. The recovery officially began nearly four years ago, in June 2009, yet real GDP growth has averaged just 2.1% a year since then.

According to the latest estimate, the economy grew just 1.6% in 2012, measured on a fourth-quarter-to-fourth-quarter basis. Growth in the fourth quarter was particularly weak, eking out just a 0.1% gain. Most economists pointed to a number of temporary factors that adversely affected performance in the fourth quarter - in particular, Hurricane Sandy had an enormous impact on economic activity in the Northeast.

However…

Beneath the very weak headline number, there were some signs of improvement in consumption, business investments and residential investments. Thus, there is reason to be somewhat optimistic for the coming quarters.

I anticipate that the pace of growth will pick up somewhat, to about 3% in 2013 and 2014 - a pace that is slightly above the trend. My outlook is somewhat more optimistic than that of some forecasters.

For instance, the median forecast in the Philadelphia Fed’s first-quarter Survey of Professional Forecasters is for the economy to grow at a 2.4% pace from the fourth quarter of 2012 to the fourth quarter of 2013.

My forecast of 3% growth should allow for continued improvements in labor market conditions, including a gradual decline in the unemployment rate, similar to the improvements we have seen over the past two years.

So, why has the recovery been so tepid? To understand this, we need to understand the nature of the shocks that have hit the economy. We now understand that we entered the most recent recession over-invested in the housing and financial sectors. The economic adjustments as a result of the boom and bust in housing have been painful.

The housing and financial sectors have both shrunk as a share of the economy, and it would not be particularly wise to seek to return those sectors to their pre-crisis highs. We learned the hard way that those levels were not sustainable. Thus, labor and capital must be reallocated to other uses. Moreover, the labor force needs to be at least partially retooled to match the skills employers now demand. This adjustment takes time. It is painful, to be sure, but it will lead to a healthier economy in the long run.

The housing collapse also significantly reduced consumer spending, which accounts for about 70% of the nation’s gross domestic product. The sharp decline in housing values destroyed a lot of the equity that families had built up in their homes. Thus, a huge chunk of their savings vanished.

With that wealth gone, it is only natural for consumers to want to rebuild savings. Consequently, private savings rates have risen substantially, and consumption by households has been restrained.

I believe these adjustments cannot be significantly accelerated through traditional government policies that seek to stimulate aggregate demand. This is especially true in the case of ever more aggressive monetary policy accommodation.

The conventional view is that by lowering interest rates, monetary accommodation tends to encourage households to reduce savings and thus consume more today. However, as I’ve noted, in the current circumstances, consumers have strong incentives to save. They are deleveraging and trying to restore the health of their balance sheets, so they will be able to retire or put their children through college. They are behaving wisely and in a perfectly rational and prudent way in the face of the reduction in wealth.

In fact, low interest rates and fiscal stimulus spending that leads to larger government budget deficits may be designed to stimulate aggregate demand or consumption, but they could actually do the opposite. For example, low interest rates encourage households to save even more because the return on their savings is very small. And large budget deficits suggest to households that they are likely to face higher taxes in the future, which also encourages more saving.

In my view, until household balance sheets are restored to a level that consumers and households are comfortable with, consumption will remain sluggish. Attempts to increase economic "stimulus" may not help speed up the process and may actually prolong it.

Businesses interpret increased savings and the modest growth in consumer spending as weak demand. This causes them to slow production, as well as hiring and investment. And this has made progress on employment slower than it was in recoveries from earlier deep recessions. For instance, in the recession that occurred in 1981-82, unemployment peaked at 10.8%. Yet, by the end of 1985, three years later, the rate had fallen 3.8 percentage points to 7%.

In contrast, today's improvement in labor markets has occurred at a relatively slow pace. The unemployment rate peaked at 10.1% in October 2009, but in the three years since then, the rate has fallen only about 2.2 percentage points, to 7.9%, where it stood in January. With the economic recovery continuing, I believe we will see the unemployment rate fall at a similar pace, to near 7% by the end of 2013.

Uncertainty is the other factor restraining hiring and investment by businesses. Many U.S. firms have restrained hiring and investing as businesses and consumers wait to see how our own fiscal problems will be resolved.

There remains significant uncertainty about the choices that will be made. How much will tax rates rise? How much will government spending be cut? U.S. fiscal policy is clearly on an unsustainable path that must be corrected. Efforts by Congress and the administration at the end of last year reduced some of the near-term uncertainty over personal tax rates. But the impact of the sequester, the debate over the continuing resolution to fund the federal government and the debt ceiling, which will once again become binding in the spring, all have clouded the fiscal policy situation. So, the resultant uncertainty will likely be a drag on near-term growth.

In my view, until uncertainty has been resolved, monetary policy accommodation that lowers interest rates is unlikely to stimulate firms to hire and invest. Firms have the resources to invest and hire, but they are uncertain as to how to put those resources to their highest valued use.

To sum up, there are good reasons to expect that the recovery will continue but at a moderate pace over the next couple of years.

Charles I. Plosser is president and CEO of the Federal Reserve Bank of Philadelphia. This article is adapted and edited from a speech delivered before the recent annual meeting of the Economic Development Co. and Economic Development Finance Corp. of Lancaster County, Pa. The original text is online.

YES, international finance collectives, G7 and G20 have been pulling their best Basil Fawlty impressions of late.

With straight faces they are claiming that the policies they are pursuing, which have weakened the US dollar, severely weakened the Yen and which will soon weaken the Euro and Pound, are not currency manipulation.

"No, not us! We wouldn’t do that!"

Just look at their recent communique from the G20 and what it said about currencies:

“We reaffirm our commitment to cooperate for achieving a lasting reduction in global imbalances, and pursue structural reforms affecting domestic savings and improving productivity. We reiterate our commitments to move more rapidly toward more market-determined exchange rate systems and exchange rate flexibility to reflect underlying fundamentals, and avoid persistent exchange rate misalignments and in this regard, work more closely with one another so we can grow together.”

“Reflect underlying fundamentals”, translates to “we’re weak but you BRICS and Aussies are strong so your currencies and Economies have to suffer”. It was G20, or more correctly G7 speak for "Don’t mention the War!"

Pulling the triggerCertainly the folks at the Federal Reserve (Fed), Bank of England (BoE) or Bank of Japan (BoJ) would claim that they have not fired any shots in anger, but prisoners are being taken all over the world. The Fed’s unconventional policy has, until very recently, had the twin successes for the Fed of driving stocks up and the US dollar down, as the US economy has clearly improved relative to most of the rest of the world. Exports as a proportion of the US GDP are up 3-4% since the beginning of the GFC.

Plenty of shots have been fired in the battle to get those numbers moving and plenty of foreign business owners are smarting from the Fed’s phony war. Nope -- ask the Fed and what you might hear is, "Not me Sir! It’s those Chinese; they are the ones who manipulate their currency. Not us, certainly not!"

It’s almost like the Cat in the Hat is about to jump out or Basil Fawlty is going to be appointed Treasury Secretary or Chairman of the Fed.

Collateral DamageThe Japanese are only slightly less overt about their intentions. Gone are the days of the stealthy approach. No, Japan under Prime Minister Shinzo Abe favours a more direct approach of simply seeking to destroy the Bank of Japan’s credibility and in so doing drive the USDJPY rate from high 70s to above 96, as witnessed in the early weeks of March.

Since Brazil’s Finance Minister Guido Mantega accused the big nations of launching a currency war back in 2011 against the rest of the world, there has been denial after denial. Yet somehow, the Yen to USD has now fallen to an average of 92 in 2013 from an average of 80 in 2012 and 79.5 in 2011. This is more than 15% devaluation against the USD and such similar movement can also be seen against the Chinese Renmimbi.

What is clear is that the big guys are saying "do as we say, not do as we do." But who could argue that the Chinese economic miracle and the recovery from the 2009 economic weakness could have proceeded at the pace (or even proceeded at all) if the CNY was a truly floating currency against the US dollar and others? It takes around 6.2 Yuan to buy 1 US dollar at the moment, but where would it be otherwise? 3.5? 4.5? Or maybe just somewhere in the 5s? Any way you look at it though, the Yuan is undervalued.

And therein lies the rubThe big nations have set internal monetary policies and quantitative easing with the express purpose, although not stated publicly (except perhaps in Japan), of improving their competitiveness globally through currency weakness.

The Australian dollar is still above 1.02 even when Europe is weak; Japan stagnant, the UK about to have a triple dip recession and the US is only just now starting to climb out of the doldrums. As the Reserve Bank has said many times recently, the Aussie dollar has been stronger than might have been expected.

But like the Brazilians, there is little anyone can do to fight the combined might of the big 4 Central Banks of the Fed, ECB, BoJ and BoE. Countless times over the years, from the Plaza Accord to until the next G20 meeting, they have and will set currency levels when and where they want them.

I've been making some doubting noises here about gold for a while now, , ,

==========================

Below the streets of Lower Manhattan, in the vault of the Federal Reserve Bank of New York, the world’s largest trove of gold — half a million bars — has lost about $75 billion of its value. In Fort Knox, Ky., at the United States Bullion Depository, the damage totals $50 billion.

Falling Fortunes The price of gold has had an extraordinary run up in the last 10 years, creating wealth for investors. But its price has fallen in the last two years.

And in Pocatello, Idaho, the tiny golden treasure of Jon Norstog has dwindled, too. A $29,000 investment that Mr. Norstog made in 2011 is now worth about $17,000, a loss of 42 percent.

“I thought if worst came to worst and the government brought down the world economy, I would still have something that was worth something,” Mr. Norstog, 67, says of his foray into gold.

Gold, pride of Croesus and store of wealth since time immemorial, has turned out to be a very bad investment of late. A mere two years after its price raced to a nominal high, gold is sinking — fast. Its price has fallen 17 percent since late 2011. Wednesday was another bad day for gold: the price of bullion dropped $28 to $1,558 an ounce.

It is a remarkable turnabout for an investment that many have long regarded as one of the safest of all. The decline has been so swift that some Wall Street analysts are declaring the end of a golden age of gold. The stakes are high: the last time the metal went through a patch like this, in the 1980s, its price took 30 years to recover.

What went wrong? The answer, in part, lies in what went right. Analysts say gold is losing its allure after an astonishing 650 percent rally from August 1999 to August 2011. Fast-money hedge fund managers and ordinary savers alike flocked to gold, that haven of havens, when the world economy teetered on the brink in 2009. Now, the worst of the Great Recession has passed. Things are looking up for the economy and, as a result, down for gold. On top of that, concern that the loose monetary policy at Federal Reserve might set off inflation — a prospect that drove investors to gold — have so far proved to be unfounded.

And so Wall Street is growing increasingly bearish on gold, an investment banks and others had deftly marketed to the masses only a few years ago. On Wednesday, Goldman Sachs became the latest big bank to predict further declines, forecasting that the price of gold would sink to $1,390 within a year, down 11 percent from where it traded on Wednesday. Société Générale of France last week issued a report titled, “The End of the Gold Era,” which said the price should fall to $1,375 by the end of the year and could keep falling for years.

Granted, gold has gone through booms and busts before, including at least two from its peak in 1980, when it traded at $835, to its high in 2011. And anyone who bought gold in 1999 and held on has done far better than the average stock market investor. Even after the recent decline, gold is still up 515 percent.

But for a generation of investors, the golden decade created the illusion that the metal would keep rising forever. The financial industry seized on such hopes to market a growing range of gold investments, making the current downturn in gold felt more widely than previous ones. That triumph of marketing gold was apparent in an April 2011 poll by Gallup, which found that 34 percent of Americans thought that gold was the best long-term investment, more than another other investment category, including real estate and mutual funds.

It is hard to know just how much money ordinary Americans plowed into gold, given the array of investment vehicles, including government-minted coins, publicly traded commodity funds, mining company stocks and physical bullion. But $5 billion that flowed into gold-focused mutual funds in 2009 and 2010, according to Morningstar, helped the funds reach a peak value of $26.3 billion. Since hitting a peak in April 2011, those funds have lost half of their value.

“Gold is very much a psychological market,” said William O’Neill, a co-founder of the research firm Logic Advisors, which told its investors to get out of all gold positions in December after recommending the investment for years. “Unless there is some unforeseen development, I think the market is going lower.”

Gold’s abrupt reversal has also been painful for companies that were cashing in on the gold craze. In the last year, two gold-focused mutual funds were liquidated after years of new fund openings, Morningstar data shows. Perhaps the most famous company to come out of the 2011 gold rush, the retail trading company Goldline, has drastically cut back its advertising on cable television, lowering spending to $3.7 million from $17.8 million in 2010, according to Kantar Media.

Page 2 of 2) Goldline agreed to pay $4.5 million last year to settle charges brought by the city attorney of Santa Monica, Calif., accusing the company of running a bait-and-switch operation. Goldline did not respond to requests for comment for this article.

A 1-ounce gold coin. Some investors expecting high inflation are sticking with gold, but it lost $28 an ounce on Wednesday. But the worst news for gold is probably good news for the broader economy, which, though still struggling to grow, has recovered from its lows. “As the economy improves, the demand for gold as a financial hedge declines more than the fundamental demand for gold jewelry increases,” said Daniel J. Arbess, a partner at Perella Weinberg Partners, who sold off his fund’s large stake in gold in the fourth quarter of 2012.

Investment professionals, who have focused many of their bets on gold exchange-traded funds, or E.T.F.’s, have been faster than retail investors to catch wind of gold’s changing fortune. The outflow at the most popular E.T.F., the SPDR Gold Shares, was the biggest of any E.T.F. in the first quarter of this year as hedge funds and traders pulled out $6.6 billion, according to the data firm IndexUniverse. Two prominent hedge fund managers who had taken big positions in gold E.T.F.’s, George Soros and Louis M. Bacon, sold in the last quarter of 2012, according to recent regulatory filings.

“Gold was destroyed as a safe haven, proved to be unsafe,” Mr. Soros said in an interview last week with The South China Morning Post of Hong Kong. “Because of the disappointment, most people are reducing their holdings of gold.”

Gold’s most vocal bulls say gold doubters are losing faith too easily. Peter Schiff, the chief executive of the investment firm Euro Pacific Capital, said that he still expected gold to hit $5,000 an ounce within a few years because, he said, the world is headed for a period of dangerous hyperinflation.

“People believe the U.S. economy is recovering. It’s not,” said Mr. Schiff.

The most famous investor who is standing by gold is John Paulson, the hedge fund manager who made a fortune betting against the American housing market. His $900 million gold fund reportedly dropped 26 percent in the first two months of this year.

Mr. Paulson’s losses were particularly severe because he bet heavily on gold mining companies, which have fallen more sharply than gold itself. Mr. Norstog, in Pocatello, made a similar mistake. He put his money in a gold fund that was focused on mining company stocks.

“If I had to do it all over again, I would have just bought the gold,” Mr. Norstog said. “At least that way I could have run my fingers through the glittering coins.” ===============================================Bitcoin crashes:

I would love to buy and own gold today - but not at 1500 or 1700/oz. Maybe if the price was 1/3 of that (and if I had money). The article is mostly negative about gold but all that really happened is that it already went up way too far too fast for too long prior to the 2 year, relatively small drop that is the focus here. In total it went up about 4 times what stocks did over the last 12 years.

"Analysts say gold is losing its allure after an astonishing 650 percent rally from August 1999 to August 2011." ... "Even after the recent decline, gold is still up 515 percent. "

The lesson I see with gold (to apply to stocks now) is that waiting to buy until after a huge, unexplainable rise and after it is all the hype in the media is the opposite of buying low or selling high. When something is overbought and over-hyped, stay away. What goes up too far too fast eventually goes down. I think they call it the law of gravity.

Those who predicted that total, global financial collapse would happen by now had their timing wrong.

I own gold not as an investment vehicle, but as an insurance policy against what I believe is an inevitable hyper-inflationary scenario/financial collapse. Gold stocks or ETFs are NOT alternatives to owning physical gold and silver under this scenario. As I'm sure everyone here will agree, it's better to be prepared in case this happens, rather than find yourself with worthless paper money and stocks. Just a suggestion. Think Weimar Germany in the 1930's. And YES, I think it could happen here - even globally.

Logged

"You have enemies? Good. That means that you have stood up for something, sometime in your life." - Winston Churchill.

a) I'm not see any drop at all in the gold line for the year 2013 and in point of fact it has dropped over $250;

b) more to the point, how about a chart that goes back to 1973, when Nixon-Connaly took the dollar off gold and by so doing set off world-wide inflation?

What I am raising here and now is the question of the applicability vel non of the late '70s to now. Gold went from $38 to over $800. Percentage wise that is some 2100%!!!(double check my math someone please)

Then look at what happened when Carter had to appoint Volcker to the Fed and V. raised interest rates? Gold crashed. If you bought at 800 and held, how many decades did you have to wait, interest free btw, to return to 800?

Right now we have negative real interest rates. Can that continue? What happens to gold when it does not?

IMHO, there is currently a fire-sale on gold and silver, and one should be buying, not selling. The article below details many of the events I've noticed through my own research. As I asked in a previous post - when the economic collapse comes - and I believe it will within the next five years - would you rather own hard assets, or a pile of worthless stocks and/or paper money?

Why Are The Banksters Telling Us To Sell Our Gold When They Are Hoarding Gold Like Crazy?

The big banks are breathlessly proclaiming that now is the time to sell your gold. They are warning that we have now entered a "bear market" for gold and that the price of gold will continue to decline for the rest of the year. So should we believe them? Well, their warnings might be more credible if the central banks of the world were not hoarding gold like crazy. During 2012, central bank gold buying was at the highest level that we have seen in almost 50 years. Meanwhile, insider buying of gold stocks has now reached multi-year highs and the U.S. Mint cannot even keep up with the insatiable demand for silver eagle coins. So what in the world is actually going on here? Right now, the central banks of the world are indulging in a money printing binge that reminds many of what happened during the early days of the Weimar Republic. When you flood the financial system with paper money, that is eventually going to cause the prices for hard assets to go up dramatically. Could it be possible that the banksters are trying to drive down the price of both gold and silver so that they can gobble it up cheaply? Do they want to be the ones sitting on all of the "real money" once the paper money bubble that we are living in finally bursts?

Over the past few weeks, nearly every major newspaper in the world has run at least one story telling people that it is time to sell their gold. For example, the following is from a recent Wall Street Journal article entitled "Goldman Sachs Turns Bearish on Gold"...

Another longtime gold bull is turning tail.

Investment bank Goldman Sachs Group Inc. said Wednesday that gold's prospects for the year have eroded, recommending investors close out long positions and initiate bearish bets, or shorts. The shift in outlook was the latest among banks and investors who have soured on gold as its dozen-year runup has been followed by a 12% decline in the last six months.

Goldman began the year predicting gold would decline in the second half of 2013, but said Wednesday the drop began earlier than expected and doesn't appear likely to reverse. Like others, the firm said the usual catalysts that have been bullish for gold during its run are no longer working.

Major banks over in Europe are issuing similar warnings about the price of gold. The following is from a Marketwatch article entitled "Sell gold, buy oil, Societe Generale analysts say"...

Analysts at Societe Generale predict in a note Thursday that gold prices will fall below $1,400 by the year’s end and continue heading south next year.

They cite two main reasons:

1. Inflation has so far stayed low and now investors are beginning to see economic conditions that would justify an end to the Fed’s quantitative easing program.2. The dollar has started trending higher, which should make gold prices move lower as the physical gold market is extremely oversupplied without continued large-scale investor buying.

And even Asian banks are telling people to sell their gold at this point. According to CNBC, Japanese banking giant Nomura is another major international bank that has turned "bearish" on gold...

Nomura forecast gold prices will fall in 2013, on Thursday, becoming the latest bank to turn bearish on the precious metal which has been a favorite hedge for investors who fear aggressive monetary stimulus will lead to rising inflation.

"For the first time since 2008, in our view, the investment environment for gold is deteriorating as economic recovery, rising interest rates and still benign Western inflation (for now) will likely leave some investors rethinking their cumulative $240 billion investment in gold over the past four years," wrote Nomura analysts in a sector note on Thursday.

A lot of financial analysts are urging people to dump gold and to jump into stocks where they "can get a much better return". They make it sound like it is only going to be downhill for gold from here. The following is from a recent CNBC article entitled "Gold's 'Death Cross' Isn't All Investors Are Worried About"...

Gold is flashing the "death cross" but the bearish chart pattern is not the only thing scaring investors.

The magnetic appeal of a rising stock market has pulled some investment funds away from the yellow metal. Since the beginning of the year, stocks are up nearly 7 percent and gold is down nearly 6 percent.

But if gold is such a bad investment, then why are the central banks of the world hoarding gold like crazy?

According to the World Gold Council, gold buying by global central banks in 2012 was at the highest level that we have seen since 1964...

Worldwide gold demand in 2012 was another record high of $236.4 billion in the World Gold Council’s latest report. This was up 6% in value terms in the fourth quarter to $66.2 billion, the highest fourth quarter on record. Global gold demand in the fourth quarter of 2012 was up 4% to 1,195.9 tonnes.

Central bank buying for 2012 rose by 17% over 2011 to some 534.6 tonnes. As far as central bank gold buying, this was the highest level since 1964. Central bank purchases stood at 145 tonnes in the fourth quarter. That is up 9% from the fourth quarter of 2011, and the eighth consecutive quarter in which central banks were net purchasers of gold.

This all comes on the heels of decades when global central banks were net sellers of gold. Marcus Grubb, a Managing Director at the World Gold Council, says that we are witnessing a fundamental change in behavior by global central banks...

Central banks’ move from net sellers of gold, to net buyers that we have seen in recent years, has continued apace. The official sector purchases across the world are now at their highest level for almost half a century.

Meanwhile, insiders seem to think that gold stocks are actually quite undervalued right now. In fact, insider buying of gold stocks is now at a level that we have not seen in quite some time. The following is an excerpt from a recent Globe and Mail article entitled "Insider buying of gold stocks surges to multi-year highs"...

The TSX global gold index has lost about a third of its value over the past two years. The S&P/TSX Venture Exchange, stock full of gold mining juniors, hit a multi-year low this month.

Yet, executives and officers who work within those businesses are showing remarkable confidence that the sector is poised for better times.

In addition, the demand for physical silver in the United States seems to be greater than ever before. According to the U.S. Mint, demand for physical silver coins hit a new all-time record high during the month of February.

And demand for silver coins has not abated since then. Just check out what has been happening in April so far...

The US Mint has updated April sales statistics for the first time since last week, and to no surprise, the Mint again reported more massive sales, with another 833,000 silver eagles reported sold Monday! The April total through 6 business days is now 1.645 million ounces, bringing the 2013 total to a massive 15.868 million ounces. In response to the continued massive demand for silver eagles, the mint also has begun rationing sales of silver eagles to primary dealers resulting in supply delays! Just as was seen in January, tight physical supplies have seen premiums on ASE’s skyrocketing over the weekend and throughout the day, as ASE’s are rapidly becoming as scarce as 90%!

Something does not appear to add up here.

I also found it very interesting that according to Reuters, Cyprus is being forced to sell most of their gold reserves in order to help fund the bailout of their banking system...

Cyprus has agreed to sell excess gold reserves to raise around 400 million euros (341 million pounds) and help finance its part of its bailout, an assessment of Cypriot financing needs prepared by the European Commission showed.

So exactly who will they be selling that gold to?

And I also found it very interesting to learn that Comex gold inventories have been falling dramatically over the last few months. The following is from a recent article by Tekoa Da Silva...

A stunning piece of information was brought to my attention yesterday. Amid all the mainstream talk of the end of the gold bull market (and the end of the gold mining industry), something has been discretely happening behind the scenes.

Over the last 90 days without any announcement, stocks of gold held at Comex warehouses plunged by the largest figure ever on record during a single quarter since eligible record keeping began in 2001 (roughly the beginning of the bull market).

In particular, something very unusual appears to be happening with JP Morgan Chase's gold...

JP Morgan Chase’s reported gold stockpile dropped by over 1.2 million oz.’s, or rather, a staggering $1.8 billion dollars worth of physical gold was removed from it’s vaults during the last 120 days.

So what does all of this mean?

I don't know. But I would like to find out. Someone is definitely up to something.

Meanwhile, the central banks of the globe seem determined to put their reckless money printing into overdrive.

For example, the Bank of Japan actually plans to double the monetary base of that country by the end of 2014 as a recent Time Magazine article described...

On Thursday, the new governor of the Bank of Japan (BOJ), Haruhiko Kuroda, announced that the central bank would double the monetary base of the country — adding an additional $1.4 trillion — by the end of 2014 in an attempt to end the deflation plaguing the economy. To achieve that, Kuroda will buy government bonds and other assets to inject cash into the economy — what has now become familiar as quantitative easing, or QE — to bump inflation up to a targeted 2%. The plan is part of a greater strategy ushered in by new Japanese Prime Minister Shinzo Abe to restart the economy through massive fiscal and monetary stimulus. It also expands on the efforts by the Federal Reserve, Bank of England and European Central Bank to stimulate growth and smooth over financial turmoil by infusing huge sums of new money into the global economy.

Many in the western world have been extremely critical of this move, but the truth is that we actually started this "currency war". The Federal Reserve has been recklessly printing money for years, and even though we are now supposedly in the midst of an "economic recovery", the Fed is actually doing more quantitative easing than ever.

Anyone that thinks that gold and silver are bad investments for the long-term when the central banks of the world are being so reckless should have their heads examined.

However, I do believe that gold and silver will experience wild fluctuations in price over the next several years. When the next stock market crash happens, gold and silver will go down. It happened back in 2008 and it will happen again.

But in response to the next major financial crisis, I believe that the central banks of the globe will become more reckless than anyone ever dreamed possible. At that point I believe that we will see gold and silver soar to unprecedented heights.

Yes, there will be huge ups and downs for gold and silver. But in the long-term, both gold and silver are going to go far, far higher than they are today.

Logged

"You have enemies? Good. That means that you have stood up for something, sometime in your life." - Winston Churchill.

"a) I'm not see any drop at all in the gold line for the year 2013 and in point of fact it has dropped over $250"

True. I realize the chart is not updated for 2013. Still in that time frame, gold is still miles above the S&P line. If gold had gone to 1500 from 1200 instead of from 1700, this story line would be different.

b) more to the point, how about a chart that goes back to 1973, when Nixon-Connally took the dollar off gold and by so doing set off world-wide inflation?What I am raising here and now is the question of the applicability vel non of the late '70s to now. Gold went from $38 to over $800. Percentage wise that is some 2100%!!!(double check my math someone please) Then look at what happened when Carter had to appoint Volcker to the Fed and V. raised interest rates? Gold crashed. If you bought at 800 and held, how many decades did you have to wait, interest free btw, to return to 800?Right now we have negative real interest rates. Can that continue? What happens to gold when it does not?

I agree. Time frames picked to demonstrate a point are always selective. Same goes for stocks. The peaks and troughs seem obvious in hindsight but not so much in real time. Why didn't we buy more of anything at the bottom or sell more at the top? To do so you have to turn against the thinking of the masses and the experts.

Gold is the anti-investment. It is what you buy when things, especially monetary, are about to go to hell. It is the opposite of investing in the economy, investing in plant and equipment for hiring and producing. When gold makes sense it means the other choices suck, such as anything based in the US dollars or other currencies. That is the debate we are having. These are in-between times where we see slight growth but also stupidity and stagnation.

The people who pulled money out of other investments to buy gold already did that. These fundamentals have looked the same for a long time now. In order to buy more now, you first need to make more money in the productive sector, pay taxes on it, and then move it to gold. But gold buyers were pulling their money out of the productive economy so making more there that just keeps getting harder. It is very hard to drive the price up further from such lofty levels.

The comparison to the 1970s is only partly valid. That same day in 1973 Nixon enacted fascist price-wage controls because the inflation scare was already so severe and then inflation went on to double again by the end of the decade. Today there is denial of inflation and we have a Fed that can barely remember that the value of the dollar is part of its mission.

Australia’s announcement that it is abandoning the U.S. dollar for trade with China is the latest broadside in the global currency war. Starting April 10, Australia and China will no longer use the U.S. dollar for trade between the two nations. For the first time, Australian businesses will be able to conduct trade in Chinese yuan. No more need for U.S. dollar intermediation.

This is a significant announcement and key development for China as it continues its campaign to internationalize the yuan and chip away at the dollar’s role as the world’s reserve currency.

Australian Prime Minister Julia Gillard made the announcement during an official visit to Shanghai on Monday. She noted that China is now Australia’s biggest trading partner and that the direct currency trading would be a “huge advantage for Australia.”

She called the currency accord a “strategic step forward for Australia as we add to our economic engagement with China.”

According to hsbc bank, more than 40 percent of small and medium-size Australian businesses that trade with China plan to offer quotes for goods and services in yuan. No longer will Chinese customers need U.S. dollars before purchasing Australian goods.

For China, this is a big accomplishment as it works toward its goal of having about a third of its foreign trade settled in yuan by 2015.

But for the U.S. dollar, it is more like the treatment the U.S. Eighth Army got at Chosin Reservoir in Korea.

This Australia-China currency pact isn’t the only whipping the dollar has taken lately either.

On March 26, China and Brazil agreed to cut out the U.S. dollar for approximately half of their trade. Some $30 billion worth of commerce per year will now be conducted in yuan and reals. Brazilian Economy Minister Guido Mantega said the trade and currency agreement would act as a buffer against any unexpected dollar turbulence in the international financial markets.

Less than a week later, China announced its participation in the joint brics bank initiative. Brazil, Russia, India, China and South Africa announced the creation of a new development bank that some analysts say has the potential to rival the U.S.-dominated World Bank and European-influenced International Monetary Fund.

“Most people assume that the current economic crisis has led to a great strengthening of the power of the World Bank and the imf, and that this power is largely uncontested,” notes Prof. Geoffrey Wood, who teaches at Warwick Business School. “The proposed brics development bank represents an important new development that potentially further circumscribes the influence of these bodies.”

America’s other major ally in the Pacific announced last year that it would be curtailing its use of the dollar too. In June, Japan and China began cutting out the dollar in bilateral trade. The initiative was announced as part of a broad agreement to reinforce financial ties between the world’s third- and fourth-largest economies.

Similar dollar exclusion deals have been announced by Russia and China, Russia and Iran, India and Iran, and India and Japan.

“[T]he free lunch the U.S. has enjoyed ever since the advent of the U.S. dollar as world reserve currency may be coming to an end,” writes popular financial blog ZeroHedge. “And since there is no such thing as a free lunch, all the deferred pain the U.S. Treasury Department has been able to offset thanks to its global currency monopoly status will come crashing down the second the world starts getting doubts about the true nature of just who the real reserve currency will be in the future.”

As more nations challenge the dollar’s position as reserve currency it will greatly impact living standards in America. Interest rates will skyrocket. The government will be forced to resort to full-scale money printing to finance its debt. Credit and loans will become unaffordable, collapsing much of America’s consumer economy. Monetary inflation will shoot through the roof destroying the value of people’s savings. And higher levels of unemployment will become a way of life.

By jumping ship and swimming to China, Australia may think it will mitigate the worst of the looming dollar war. But eking out strategic partnerships with China comes with a whole set of other risks that are just as deadly. ▪

"I fail to see how "direct currency convertibility between Aussie dollars and Chinese yuan will hurt the dollar in any meaningful fashion. Currently the dollar is an intermediary in a transaction between Australia and China, now it will be bypassed. Dollars were held for only a fraction of a second before, now they won't be held at all. The value of the dollar is not a byproduct of its use in transactions, it is a function of the world's demand to hold the existing stock of dollars relative to its demand to hold the existing stock of other currencies. Changing the way in which money flows between China and Australia doesn't really affect the demand for dollars.

"If the yuan benefits from moves such as these, it is because transactions in yuan are becoming more efficient, and therefore on the margin the world may be more inclined to hold yuan rather than dollars. China will have to back up such minor improvements such as these by removing the constraints to capital flowing into and out of China. That will be a big deal when it happens."

The Consumer Price Index (CPI) declined 0.2% in March, coming in below consensus expectations of no change. The CPI is up 1.5% versus a year ago.“Cash” inflation (which excludes the government’s estimate of what homeowners would charge themselves for rent) was down 0.3% in March but is up 1.3% in the past year.The decline in the CPI in March was due to a 2.6% drop in energy prices. Food prices were unchanged. Most other major categories saw small gains. The “core” CPI, which excludes food and energy, was up 0.1% in March, coming in just below the consensus expected gain of 0.2%. Core prices are up 1.9% versus a year ago.Real average hourly earnings – the cash earnings of all employees, adjusted for inflation – were up 0.2% in March and are up 0.3% in the past year. Real weekly earnings are up 0.6% in the past year.Implications: Despite the headline number of a 0.2% decline in the CPI, it looks like loose monetary policy is starting to nudge up underlying inflation. In the first three months of the year, consumer prices have accelerated, up at a 2.1% annual rate compared to up only 1.5% in the past year. The decline in CPI in March was due to energy prices, which are obviously volatile and which fell 2.6%. “Core” prices, which exclude food and energy, were up 0.1% in March and are up 1.9% from a year ago. Neither overall nor core price gains in the past year set off alarm bells. Instead, they suggest the Federal Reserve’s preferred measure of inflation, the PCE deflator (which usually runs a ¼ point below the CPI) remains well below the Fed’s target of 2%. We don’t expect this to last. However, for the Fed, the key measure of inflation is its own forecast of future inflation. So even if inflation goes to roughly 3% within the next year (which we expect), as long as the Fed projects the rise to be temporary it will not react by raising short-term interest rates. The Fed is more focused on the labor market and, we believe, is willing to let inflation exceed its long-term target of 2% for a prolonged period of time in order to get the unemployment rate down. The best news in today’s report was that “real” (inflation-adjusted) average hourly earnings rose 0.2% in March. Given today’s news it looks like “real” (inflation-adjusted) consumer spending grew at a 2.5 – 3.0% annual rate in Q1, consistent with our forecast of 3% real GDP growth.

Norman Vialle, a 53-year-old car dealer in Kansas, invested in his share of winners and losers during the Internet bubble of the 1990s. Now he is clinging to a stash of Bitcoin, even though the fledgling virtual currency has lost about 70% of its value in the past week.

"It's volatile because it's new, but it's still a lot higher than it was a month ago," Mr. Vialle says.

In addition to investing in the currency, Mr. Vialle recently began accepting bitcoins for payment at Overland Park Jeep Dodge Ram Chrysler. One of his customers is planning to pay for a $40,000 Jeep with the currency next month.

Bitcoin is attracting attention as a wildly volatile, all-digital currency. How does it work? How are criminals taking advantage of it? How risky an investment is it? In this Bitcoin explainer, WSJ's Jason Bellini has "The Short Answer."

It has been a volatile month for Bitcoin, the virtual currency that is based on a mathematic algorithm and can be used to buy everything from maple syrup to pornography.

A furious run-up in the value of Bitcoin earlier this month has been followed by an abrupt price drop that has rattled investors. The price of one Bitcoin unit continued its dive on Tuesday, falling 39% at one point to $50 before recovering somewhat to around $70.

The unpredictable trading has given fresh fuel to skeptics, who question the viability of a volatile currency that isn't backed by a central bank.

"I think there are some businesses that offer legitimate goods that like the concept and like the cachet of it," said Beth Robertson, a senior consultant with Javelin Strategy and Research, which focuses on the payments industry. "But I don't think that you're going to see any broad base of merchants accepting Bitcoin."

Regulators, meanwhile, recently weighed in on virtual currencies for the first time, encouraging entities that exchange or sell them to follow the same money-laundering rules that apply to companies like Western Union Co. WU +1.13% .Despite the lack of wide acceptance and looming prospect for regulation, a cadre of Silicon Valley venture capitalists, Web programmers and anti-Establishment thinkers are still revved up about Bitcoin's prospects.

Unlike currencies that are backed by a central bank, Bitcoin users can essentially create the units themselves in a process called "mining" that involves solving a complicated mathematical problem with sophisticated computer servers.

The currency, which is stored in an online account, also can be traded on an exchange and swapped privately.

Bitcoin payments are becoming increasingly popular among Internet merchants, who want to reduce costs associated with accepting credit cards.

Bits and PiecesMystery still surrounds Bitcoin – its creator – or creators – has remained anonymous and specific details surrounding its history remain fuzzy. But buzz is growing, despite recent wild swings in the currency's value.

The virtual currency also is starting to make inroads in the brick-and-mortar world, where customers can pay with bitcoins using their mobile phones, but because the transactions are essentially anonymous, critics worry that the currency could be used for drug trafficking and money laundering. The U.S. Treasury Department's Financial Crimes Enforcement Network, known as FinCen, last month issued a three-page memo that effectively lays the groundwork to regulate firms that issue or exchange virtual currencies. Among other things, money transmitters must alert authorities if they believe a transaction might be tied to suspicious activity.

Despite the looming regulation, investors were encouraged by the memo. They believe increased oversight will ease money-laundering concerns that have kept some investors and merchants out of the market.

"The industry is happy about this guidance even if it imposes a regulatory burden because it is an indicator of respectability," says Behnam Dayanim, a lawyer at Paul Hastings LLP in Washington.

The memo helped spark a rally earlier this month on the Tokyo-based Mt. Gox exchange, which says that it handles 80% of Bitcoin trading. The currency nearly quintupled in less than a month, leaping from roughly $50 in mid-March to a high of $230 on April 9. But since then, Bitcoin has plunged almost as quickly as it rose. Mt. Gox suspended trading for 12 hours last week after a surge in trading volume overloaded its system. The exchange also has been hit with cyberattacks. Such wild swings could make it difficult for the virtual currency to gain traction—among investors and businesses alike, experts said.

But Jennifer Longson, who began accepting bitcoins at her San Francisco cupcake bakery in October, considers the volatility to be no different from the fluctuations she sees in the price of her baking ingredients. Customers use Bitcoin for payment three or four times a week at her store, she said. "They're all excited to talk about it," said the owner of Cups and Cakes Bakery, whose concoctions include cupcakes made with ingredients such as bacon and tequila.

Ms. Longson's husband, Tom, has been buying and selling the currency for the past year. He cashed out his original investment when the price hit $100 in early April, but bought some for $241 last week.

"I lost some money, but not enough to jump off a building. Unfortunately, I sold some to a friend at that price as well and I felt guilty about that," he said.

The price gyrations are more worrisome to John Reitano, co-founder of three-month-old CoinFlash, a San Diego company that aims to launch a bitcoin-trading network that is similar to airport currency kiosks this summer. "Our hope is that the volatility settles down over time," said Mr. Reitano, who already is preparing to answer investor questions about the issue.

Entrepreneurs hope the new FinCen guidelines will help Bitcoin evolve into a more developed currency. A number of companies are expected to register with FinCen as money transmitters in the coming months. A few already have done so, anticipating that the industry would be capturing the attention of regulators.

But Mr. Vialle, the car dealer, still views Bitcoin more as an investing opportunity than a payment mechanism. He says he plans to hang onto his bitcoins, which he mined about a year ago, for the foreseeable future. "Maybe I will use them someday, but I probably will hold them for five or 10 years," he says

Many economists and financial commentators believe that in the unregulated market of the internet economy, new forms of money can be created that bypass central-bank and government supervision. The latest development is the emergence of a new electronic means of exchange, Bitcoin (BTC). Bitcoin was launched on January 3 2009 by its inventor, a programmer called Satoshi Nakamote.

The basic idea behind Bitcoin is to create, by means of a mathematical algorithm, a digital good that is scarce and fungible.

Nakamote devised a software system that enabled people to obtain bitcoins as a reward for solving complex mathematical puzzles. The resulting coins are then used for online trading. Nakamote also arranged that the number of bitcoins can never exceed 21 million.

Some experts maintain that Bitcoin will displace the existent fiat money and will usher in a new era of free banking, which will finally put to rest the menace of inflation. Unfortunately, this is a pipe dream. Electronic money will not replace fiat paper money. The belief that it can stems from a failure to understand the nature and function of money and how it emerges on the market.

To see where this view goes wrong, let's first see how money comes about. Money emerges out of barter conditions that permit more complex forms of trade and economic calculation. The distinguishing characteristic of money is that it is the general medium of exchange, evolved from private enterprise from the most marketable commodity. On this Mises wrote,

"There would be an inevitable tendency for the less marketable of the series of goods used as media of exchange to be one by one rejected until at last only a single commodity remained, which was universally employed as a medium of exchange; in a word, money. (The Theory of Money and Credit, pp. 32-33)"

In short, money is the thing for which all other goods and services are traded. Furthermore, money must emerge as a commodity. An object cannot be used as money unless it already possesses an exchange value based on some other use. The object must have a pre-existing price for it to be accepted as money.

Why? Demand for a good arises from its perceived benefit. For instance people demand food because of the nourishment it offers. With regard to money, people demand it not for direct use in consumption, but in order to exchange it for other goods and services. Money is not useful in itself, but because it has an exchange value, it is exchangeable in terms of other goods and services.

The benefit money offers is its purchasing power, i.e. its price in terms of goods and services. Consequently for something to be accepted as money, it must have a pre-existing purchasing power: a price. This price could have only emerged if it had an exchange value established in barter. Once a thing becomes accepted as the medium of exchange, it will continue to be accepted even if its non-monetary usefulness disappears. The reason for this acceptance is that people now possess previous information about its purchasing power. This in turn enables them to form the demand for money.

In short the key to the acceptance is the knowledge of the previous purchasing power. It is this fact that made it possible for governments to abolish the convertibility of paper money into gold, thereby paving the way for the introduction of the paper standard. Again the crux here is that an object must have an established purchasing power for it to be accepted as general medium of exchange, i.e. money.

In today's monetary system, the core of the money supply is no longer gold, but coins and notes issued by governments and central banks. Consequently coins and notes constitute the standard money we know as cash that are employed in transactions. Notwithstanding this, it is the historical link to gold that makes paper money acceptable in exchange.

Observe that a bitcoin is not a thing; it is a unit of a non-material virtual currency. A bitcoin has no material shape; hence from this perspective the notion that it could somehow replace fiat money is not defendable. Bitcoin can function only as long as individuals know that they can convert it into fiat money, i.e. cash on demand (see, e.g., Lawrence H. White "The Technology Revolution And Monetary Evolution," Cato Institute's 14th annual monetary conference, May 23, 1996).

Without a frame of reference or a yardstick, the introduction of new forms of settling transactions is not possible. On this Rothbard wrote,

"Just as in nature there is a great variety of skills and resources, so there is a variety in the marketability of goods. Some goods are more widely demanded than others, some are more divisible into smaller units without loss of value, some more durable over long periods of time, some more transportable over large distances. All of these advantages make for greater marketability. It is clear that in every society, the most marketable goods will be gradually selected as the media for exchange. As they are more and more selected as media, the demand for them increases because of this use, and so they become even more marketable. The result is a reinforcing spiral: more marketability causes wider use as a medium which causes more marketability, etc. Eventually, one or two commodities are used as general media-in almost all exchanges-and these are called money."(Murray N. Rothbard, What Has Government Done to Our Money?)

It was through a prolonged process of selection that people had settled on gold as the most marketable commodity. Gold therefore had become the frame of reference for various forms of payments. Gold formed the basis for the value of today's fiat money. Besides, Bitcoin is not a new form of money that replaces previous forms, but rather a new way of employing existent money in transactions. Because Bitcoin is not real money but merely a different way of employing existent fiat money, obviously it cannot replace it.

The fact that the price of bitcoins has jumped massively lately implies that people assign a high value to the services it offers in employing existent money. This is no different from the case when in a country which imposes restrictions on taking money out people will agree to pay a high price for various means to secure their money.

Summary and conclusion

Contrary to the recent hype, we hold that Bitcoin is not money but rather a new way of employing existent money in transactions. The fact that the price of bitcoins has jumped massively lately implies that people assign a high value for the services it offers and nothing more.

Interesting piece though I don't fully agree with the optimism. I think the reason gold fell is because it went up too far, too fast, previously. The economy went from free fall in crisis to stable stagnation, which is quite an improvement. The outlook is more stagnation, far better than free fall. The gold to oil ratio pointed out in the piece is quite telling. In general, gold is how you take money out of productive business investment, so a move away from gold is some reason for optimism.

Gold's Plunge Is Cause For OptimismIt signals strength in the dollar that could reorient investment away from hedges and toward economic growth.

By JOHN TAMNY

In January 1980, the price of gold hit what was then an all-time high, $850 per ounce. Ten years earlier, gold traded at $35. Its stupendous rise in the 1970s neatly correlated with that malaise-riddled decade, as its decline in the 1980s signaled renewed prosperity.

That is why the recent decline in the price of gold—down 16% to $1,387 an ounce from $1,660 when February began—is cause for cautious optimism. Gold's recent weakness points to renewed dollar strength and, if this strength is maintained, may preview reorientation of precious capital away from dollar-devaluation hedges and toward investments in what has been called "the economy of the mind"—that is, new entrepreneurial endeavors and industries.

The precious metal has long been referred to as "the golden constant" for its steady value. An example is the skyrocketing price of gold in the 1970s, which didn't so much signal a spike in gold's value as it showed the decline of the dollar in which it was priced. If gold's constancy as a measure of value is doubted, consider oil: In 1971 an ounce of gold at $35 bought 15 barrels, in 1981 an ounce of gold at $480 similarly bought 15 barrels, and today an ounce once again buys a shade above 15.

There is another way of looking at the 1970s rise in the price of gold and decline in the value of the dollar, which has relevance for today. The weakening dollar marked a massive redistribution of wealth away from savers and equity investors, and with that redistribution a capital deficit for companies eager to grow.

When savers commit capital to new ideas, it is to receive a return in later years. But with the dollar in free fall throughout the 1970s, incentives were seriously distorted, and investments migrated toward classes of hard assets—such as commodities (oil, cotton, wheat, etc.) whose dollar-denominated prices rose and were thus least vulnerable to devaluation. Housing prices also soared. Meanwhile, stock market indexes such as the S&P 500, which represented the nation's most promising companies, nearly flattened.

If you owned a house, or were long in commodities like gold and oil, your dollar wealth rose substantially. If your savings were held in dollars or equities, your nominal wealth position flat-lined and in real terms plummeted.

Happily for investors and the U.S. economy more broadly, the dollar hit a low point in 1980 and reversed course in the next two decades. In the 1980s, gold fell 52%—and the S&P zoomed upward by 222%. In the 1990s, gold declined by another 29%—and the S&P roared, up 314% for the decade.

With the dollar on an upswing, investors had a renewed incentive to migrate out of inflation hedges and into economic sectors where new ideas offered the potential for outsize returns. The technology sector shined. However risky it was to put capital into new companies or an unproven concept, investors at least had more assurance that any returns they reaped would not be eroded by devaluation.

Fast forward to the new millennium. In January 2001, a dollar bought roughly 1/270th of an ounce of gold, but in the ensuing 12 years its value took a severe turn downward to 1/1600th of an ounce two months ago.

By August 2011, gold had soared to $1,900 from $270 in January 2001. When we take into account the greenback's extreme weakness, the alleged mystery about a "lost decade" in economic growth is quickly erased.

As in the 1970s, gold's rise in the past decade once again signaled a painful dollar devaluation that would foster a commodity boom, rising house prices and near flat markets. Though some cheer the market highs of today, it should be remembered that they're merely a return to heights last reached in 2000, when the dollar was much stronger.

All this is to emphasize that the recent fall in gold prices, while surely bad news for investors who are long in hard assets, may be good news for the future.

The unwind in these investors' positions wrought by a stronger dollar will surely be painful, but savers, unemployed workers and the broad economy have suffered long enough from a weak dollar and slow growth. It must be remembered that there are no companies and no jobs without investment first. A strong dollar would energize the savers as it did before, and savings are the economic tonic needed to get Americans working again.

The Federal Reserve is scrutinizing the nation's biggest banks to ensure they can handle an eventual rise in interest rates, as concern grows among regulators about the risks posed by a long low-interest-rate environment.

On Thursday, a panel of federal regulators charged with identifying market risks warned that a sudden rise in interest rates could have a destabilizing effect on financial markets. The Financial Stability Oversight Council, in its third annual report, cited interest-rate risk as one of seven major vulnerabilities to financial stability.

"A sudden spike in yields and volatilities could trigger a disorderly adjustment, and potentially create outsized risks," the council said in its report.

The Fed's chairman, Ben Bernanke, sits on the FSOC. Using detailed data that the central bank started collecting after the financial crisis, Fed officials are regularly running big banks' portfolio holdings through models to gauge their exposure to various changes in interest rates, according to Fed officials.

For the first time this year, the Fed asked banks to gauge their ability to withstand a hypothetical inflation and interest-rate shock as part of an annual "stress-testing" exercise.

According to Fed officials, none of the 18 largest U.S. banks saw their capital levels fall below regulatory minimums under the scenario, which featured a mix of moderate recession, rising consumer prices and rapid increases in short-term interest rates, as might occur if oil prices were to shoot sharply higher. The Fed didn't publicly release results of the scenario.

The Fed found that banks are protected in part because they have increased capital levels and because their net interest income would increase with a rate rise. They also have an inexpensive source of funds in customer deposits, which would insulate them, it found.

The Fed isn't expected to raise rates any time soon, and the monitoring isn't a signal that the central bank might shift its position—it has committed to holding rates low for a long time, at least until unemployment falls below 6.5%, as long as inflation remains stable.

The vast majority of the Fed's 19 policy makers don't believe the central bank will raise short-term rates until 2015 at the earliest.

Fed officials said they haven't seen any major vulnerabilities appear yet. Regulators have issued a steady drumbeat of warnings that banks need to be prepared for rate increases and for the impacts that a rate spike would have on their funding costs and investments.

The latest came Thursday, when the FSOC said the sustained low-interest rate environment may have led some financial institutions, including banks, to seek out higher returns by investing in longer-term securities. The council said bank supervisors and market participants "should be particularly attuned to signs of heightened interest rate and credit risk at depository institutions, credit unions, broker-dealers and bank holding companies." The FSOC warned that while so-called reaching for yield may boost near-term earnings, "it could significantly increase losses" if rates rise.

The Fed's concern stems in part from the situation that arose in 1994 when, after a relatively long period of low interest rates, the central bank began raising short-term rates to deal with rising inflation. The response caught market participants by surprise: Rates rose dramatically, bond markets plunged and investors suffered big losses. The fallout helped sink brokerage firm Kidder, Peabody & Co., pushed Orange County, Calif., into bankruptcy and wiped out a hedge fund run by Askin Capital Management that had made leveraged bets on mortgage-backed securities.

Banks are exposed to interest-rate risk in several ways, including through the value of their long-term bond holdings, which fall as interest rates rise. That could result in losses as banks are forced to reflect the declining value. Treasury and government backed mortgage securities account for about 14% of bank portfolios, up from less than 10% before the financial crisis though not as high as more than 20% in the early 1990s, according to Fed data. And if the Fed raises short-term interest rates, the banks' borrowing costs could go up.

The Fed and other banking regulators put out guidance in January 2010 telling firms to beef up their measurement and management of interest rate-related risks, highlighting regulators' concerns that banks could get caught off guard by rising rates. Among the instructions were for banks to conduct stress tests using assorted rate scenarios, including "instantaneous and significant" increases in rates and prolonged rate shocks.

The risk extends beyond banks to pension funds, insurance companies and other financial entities that invest in financial assets. The longer the low interest-rate environment persists "the more very low interest-producing assets accumulate on their balance sheets," said Sheila Bair, former chairman of the Federal Deposit Insurance Corp. "At some point the Fed's going to have to raise rates, and the market value of those lower-yielding assets are going to go down."